Australia: Explorers could strike it rich with tax breaks

Details of the Government’s proposed scheme have been released for public comment

Following on from the Coalition’s 2013 pre-election pledge to implement a tax credit scheme for mining exploration companies, the new Industry Minister, Ian Macfarlane, has released a discussion paper which sets out further details of how the scheme might operate for feedback and comment from industry.

The exploration incentive originally announced was ‘to introduce an Exploration Development Incentive that will allow investors to deduct the expense of mining exploration against their taxable income, starting on 1 July 2014’.

Although the initial announcement was met with wide spread industry support, the further details released of the Government’s policy suggest that explorers’ ability to access the scheme will be limited. In this regard, the discussion paper released is designed to be consultative and seeks responses on a number of specific matters. However, some of the key policies underlying the Government’s intended framework include that:

To be eligible, a company:

- must have no taxable income or mining activities. That is, companies that derive income from mining activities during the same income year in which they incur exploration are excluded

- must be an Australian resident for tax which is listed or widely held with over 50 members and disbursed ownership. This is disappointing as it is critically the stage prior to listing or securing wider investment that an exploration company could be assisted by such a scheme, and

- which is listed or widely held must not hold its project or exploration tenement interests through a subsidiary, which is a commonly utilised asset ownership structure.

To be eligible to receive exploration credits:

investors must hold equity interests at the time of the distribution by the company (and irrespective of whether those investors funded the exploration at the relevant earlier time which is likely to practically have been at least one to two income years’ earlier. Submissions are specifically sought as to whether it should only be new investors who can be distributed the exploration credits in order to target additional investment or alternatively, whether all investors at the relevant time should be able to participate.

Only certain exploration expenditure will be eligible:

and it must be in respect of a ‘greenfields project’. Consistent with current definitions in theIncome Tax Assessment Act, ‘exploration and prospecting’ would include ‘geological mapping, geophysical surveys, a systematic search for areas containing minerals (except petroleum) or quarry materials, and search by drilling or other means for such minerals or materials within those areas’. Under this proposal, petroleum and exploration for geothermal energy resources will be excluded. Also excluded is ‘expenditure on activities normally associated with feasibility, including activities aimed at determining whether it is economically, (including technically) feasible or commercially viable to proceed to development, or how best to develop a known mineralisation’.

A ‘greenfields project’ consistently relates to ‘exploration of unexplored or incompletely explored areas directed at discovering new resources’. It follows that eligible exploration expenditures are those ’incurred on activities that are deployed for the purposes of determining the existence, location, extent or quality of a new mineral resource in Australia’. What this is not likely to include is exploration incurred in the extension of an existing mine and also any mineralisation that has been classed as an inferred mineral resource or higher for the Joint Ore Reserves Committee (JORC) Code, and

Companies will only be able to access the scheme to the extent that the $100 million cap has not been reached

This was a feature of the original announcement and was apportioned as exploration credits capped at $25 million for expenditure during the 2014/2015 year, $35 million for 2015/2016 and $40 million for 2016/2017. It is not proposed that there be any carry forward of leftover amounts, however, it is difficult to see how there would be any with those thresholds. To monitor this cap, the paper discusses some alternatives for modulating the expected application of the credits - whether that be by way of reporting on eligible losses after the expenditure year or providing an expectation of eligible losses and reported eligible losses at the end of the expenditure year. Either way, it is proposed that the ATO determine the losses that a company may convert so that the cap is not exceeded.

Overall, the incentive is proposed to operate so that companies with exploration expenditure and tax losses in the same income year can provide exploration credits to their shareholders. This way, their shareholders would gain an entitlement to a refundable tax offset. Alarmingly, it would be expected that the tax offset would be received two financial years after the relevant year of the company’s expenditure.

Notwithstanding its potentially limited application, this is a significant and attractive scheme for eligible companies with ‘greenfields projects’ to utilise.

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.